If making yourself a priority sounds like a simple way to save, that’s because it is. By paying yourself first you’re contributing towards your financial wellbeing.
How much do you have in savings? Would you be able to pay medical bills if an emergency arose? Will you have enough money accumulated to retire comfortably? If your answer to the latter two questions is “no”, you’re not alone. Recent studies show that 26% of Australians have less than $1,000 in savings. While building this fund might seem daunting at first, there’s actually a simple and effective personal finance solution: pay yourself first to set up for financial wellbeing.
Making ‘you’ the priority
Most of us use payday as a time to settle bills and buy groceries, and perhaps as an excuse to splurge on a meal out or a new item of clothing. We promise ourselves that we’ll add to our savings at the end of the month, when everything ‘important’ has been taken care of. The problem is, many of us get to the end of the month and realise there’s nothing left to save.
What if you made paying yourself the first thing you spent your money on?
This golden rule challenges you to change the way you think about your savings by elevating it to an immediate priority, rather than an afterthought. You pay yourself, and then you pay your bills. This can help give your savings a boost by limiting your spending money by the same percentage, allowing you to put money away for your financial future.
How much should you pay yourself?
There’s no set figure for how much you should pay yourself, as the amount will change at different stages of your life. A general rule of thumb is to begin with 10% of your salary while you’re still in your 20s. It’s a small amount – you probably won’t even notice the withdrawal after a while.
As you earn more, you should re-evaluate the amount you’re paying yourself each month. As your salary grows, you’ll likely find an increase is easy, and this will ensure you have a better cushion behind you in the long term.
If you’re starting to save later in life, you might aim for a higher figure. That said, paying yourself 10% of your salary at any age is better than nothing at all.
How to start paying yourself first
- The first step is to find a high-interest account for savings , like the AMP Saver Account, that you feel comfortable with. Bank accounts of this nature may feature conditions that reward deposits while discouraging withdrawals – which may be a good thing if you’re tempted to dip into your savings.
- Then set up an automatic transfer into it from the bank account that your salary is paid into. Make sure you put the agreed percentage of your income to savings the day after your salary is deposited, so you really are paying yourself first. Because it’s automatically deposited, you don’t have to think about it.
Keep reminding yourself that these savings contributions are for your financial future, whether that’s an emergency fund or your retirement. They’re not intended for everyday expenses or impulse purchases.
Why does paying yourself first make sense?
Because it’s easy. You’re making a scheduled ‘set and forget’ savings contribution without doing or having to think about anything extra. That doesn't mean you won’t re-evaluate the amounts as your life changes. But if you’re time poor and just want to be sure you’re managing your money well, this method is simple enough and avoids the need to categorise every expense and keep complex spreadsheets.
As with most habits, saving becomes easier the longer you do it. And as you see your money grow, you’ll probably want to find new ways to cut back on where you spend money and save even more towards your financial goals.
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